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Business Impact

Intel, STMicro to partner on flash memory

SAN FRANCISCO (AP) – Intel Corp. and STMicroelectronics NV are unloading troubled divisions that make a type of flash memory used primarily in cell phones.

The chip makers and private equity firm Francisco Partners will form a new company that will buy up the assets of Intel’s and STMicro’s NOR flash businesses.

It promises to placate skittish investors concerned about the fading fortunes of NOR flash memory. Overall revenues for the chips were $8.3 billion last year, but the entire segment was unable to turn a profit, according to market researcher iSuppli Corp.

The deal signals the waning importance of NOR flash. Invented by Intel in the late 1980s, it has been steadily losing ground to NAND flash memory – a cheaper alternative that’s used in digital cameras and music players.

Until now, Intel, the world’s largest semiconductor company, has stood by its unprofitable business. The division was losing about $150 million a year before Intel formed a joint venture in 2005 with Micron Technology Inc. to produce NAND flash.

The red ink continued last year, with Intel losing about $555 million from the combined businesses due primarily to startup costs for the NAND business. Intel no longer breaks out revenue for NOR flash.

In Tuesday’s deal, Intel will get $432 million in cash for its NOR flash unit. STMicroelectronics will sell its entire flash memory operation, including the NOR division and its stake in a joint venture with Hynix Semiconductor Inc. that makes NAND flash chips, for $468 million.

No name has been chosen for the new company, which will combine businesses that generated some $3.6 billion in sales last year.

STMicroelectronics will retain 48.6 percent equity ownership, Intel will have 45.1 percent. Francisco Partners will invest $150 million in the venture for preferred stock representing a 6.3 percent stake.

Intel and STMicroelectronics each will appoint three directors to the new company’s board, with Francisco Partners naming an additional two directors.

Analysts had been expecting the deal.

”It’s good news for ST, it’s good news for Intel – they’re finally getting out from under it,” said Doug Freedman, an analyst with American Technology Research. ”And it’s probably good news for the industry.”

In a filing with the Securities and Exchange Commission, Intel said it expects to remain within its previous outlook for the second quarter and full year, except that it will no longer forecast asset impairments and restructuring charges for the second quarter.

Assuming the deal closes late in the third quarter or early in the fourth quarter of 2007, Intel said it expects fourth-quarter revenue and cost of sales will decline. Gross margins are expected to improve slightly as direct spending decreases, but still remain within the company’s prior full-year forecast.

In April, Intel raised its gross margin forecast to about 51 percent for fiscal 2007, and said revenue in the second quarter is expected to range from $8.2 billion to $8.8 billion with a gross margin of about 48 percent.

Shares of Santa Clara-based Intel rose 18 cents to $22.81, while U.S.-listed shares of Geneva-based STMicroelectronics climbed 29 cents, or 2.3 percent, to $20.17 in afternoon trading.

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